DIONISIO FIESTAN AND JUANITA ARCONADO, PETITIONERS, VS. COURT OF APPEALS; DEVELOPMENT BANK OF THE PHILIPPINES, LAOAG CITY BRANCH; PHILIPPINE NATIONAL BANK, VIGAN BRANCH, ILOCOS …

Fiestan versus Court of Appeals

The Case

This is a petition for review on certiorari brought by the spouses Dionisio Fiestan and Juanita Arconado against the Court of Appeals, the Development Bank of the Philippines, the Philippine National Bank, and the other private respondents. The spouses had mortgaged their land in Ilocos Sur to the Development Bank to secure a loan, lost the land at an extrajudicial foreclosure sale, and then went to court to annul that sale, the later sale to a private buyer, and the mortgage that buyer later constituted in favor of the Philippine National Bank. The case matters because it draws the line between three kinds of sale — ordinary execution sale, judicial foreclosure sale, and extrajudicial foreclosure sale — and holds that the strict levy requirement of the Rules of Court does not govern an extrajudicial foreclosure under the special law. It also settles that the mortgagee-creditor may itself bid and buy at its own foreclosure sale.

Procedural History

The spouses filed a complaint for annulment of sale, annulment of mortgage, and cancellation of transfer certificates of title before the Regional Trial Court of Vigan, Ilocos Sur. After trial, that court dismissed the complaint. It declared valid the extrajudicial foreclosure sale in favor of the Development Bank as highest bidder, the bank's subsequent sale to Francisco Peria, and the real estate mortgage Peria constituted in favor of the Philippine National Bank. The spouses appealed, and the Court of Appeals affirmed the trial court's decision. Their motion for reconsideration was denied, so they filed the present petition for review on certiorari with the Supreme Court.

Facts

The spouses owned a parcel of land in Ilocos Sur, covered by a transfer certificate of title, which they mortgaged to the Development Bank of the Philippines as security for a loan. When they failed to pay their mortgage indebtedness, the bank extrajudicially foreclosed the mortgage under the special law. At the public auction sale held on August 6, 1979, the bank emerged as the highest bidder. A certificate of sale was issued by the Provincial Sheriff the same day and was registered in September 1979. Earlier that same September, the spouses had themselves executed a deed of sale in favor of the bank, and that deed was likewise registered.

The spouses failed to redeem the property within the one-year redemption period, which expired in September 1980. Their title was then cancelled, and a new title was issued to the Development Bank upon presentation of an affidavit of consolidation of ownership. In April 1982 the bank sold the lot to Francisco Peria by deed of absolute sale, and a new title was issued in Peria's name. Peria secured a tax declaration, paid the taxes, and mortgaged the lot to the Philippine National Bank to secure a loan of 115,000 pesos. Because the spouses remained in possession, the Provincial Sheriff ordered them to vacate.

The spouses then sued to annul the sale, the mortgage, and the titles. Their central claim was that the extrajudicial foreclosure sale was void because the Provincial Sheriff had sold the property at public auction without first effecting a levy on it. From that premise they argued that the certificate of sale could not transfer ownership to the bank, and that everything downstream — the sale to Peria and Peria's mortgage to the Philippine National Bank — was likewise void. They also invoked the Civil Code prohibition against agents acquiring the property entrusted to them for sale.

Issues

• Whether or not a levy under the Rules of Court on ordinary execution sales is a basic requirement before an extrajudicially foreclosed property may be sold at public auction.
• Whether or not the formalities prescribed by the special law on extrajudicial foreclosure were substantially complied with.
• Whether or not the mortgagee-creditor may acquire the mortgaged property by purchase at the public auction sale, despite the Civil Code prohibition on agents acquiring property whose sale is entrusted to them.

Applicable Provisions

Section 5 of Act Number 3135, as amended, provides:

Section 5. At any sale, the creditor, trustee, or other person authorized to act for the creditor, may participate in the bidding and purchase under the same conditions as any other bidder, unless the contrary has been expressly provided in the mortgage or trust deed under which the sale made.

This is the provision that authorizes the Development Bank to bid and buy at its own foreclosure sale, and it is the special rule that prevails over the general Civil Code prohibition on agents purchasing the property entrusted to them.

Ruling

On the first issue, the Court held that the formalities of a levy are not basic requirements before an extrajudicially foreclosed property can be sold at public auction. The Court stressed that three different kinds of sale exist, each governed by a different set of law: an ordinary execution sale is governed by the pertinent provisions of Rule 39 of the Rules of Court; a judicial foreclosure sale is governed by Rule 68; and an extrajudicial foreclosure sale is governed by Act Number 3135, as amended. Since this case involved an extrajudicial foreclosure, there was no justifiable basis to apply by analogy the levy requirement of Section 15 of Rule 39. The Court explained that in extrajudicial foreclosure the property need not be identified or set apart by the sheriff from the whole mass of the mortgagor's property, because the essence of a mortgage is precisely that a property has already been set apart as security, and the mortgagor has authorized the mortgagee to sell it under the special power.

On the second issue, the Court found that the formalities prescribed under Sections 2, 3 and 4 of Act Number 3135, as amended, were substantially complied with. The notices of sale were posted by the Provincial Sheriff and published in a newspaper of general circulation in the province, setting the date of the auction sale.

On the third issue, the Court rejected the argument based on the Civil Code prohibition against agents acquiring by purchase the property whose administration or sale may have been entrusted to them. The Court held that this prohibition does not apply where the sale is made under a special power inserted in or attached to the real estate mortgage pursuant to Act Number 3135. It invoked the rule of statutory construction that, as between a specific statute and a general statute, the former must prevail, since the Civil Code is of general character while Act Number 3135 is a special enactment. The Court also explained that the power to foreclose is not an ordinary agency contemplating exclusively the representation of the principal by the agent, but is primarily an authority conferred upon the mortgagee for the latter's own protection, an ancillary stipulation inseparable from the bilateral mortgage agreement.

Doctrine

First, the levy requirement of Section 15 of Rule 39 of the Rules of Court governs ordinary execution sales only. It does not apply to an extrajudicial foreclosure sale, which is governed by the special law, Act Number 3135, as amended. Second, the formalities of that special law are satisfied by substantial compliance, including posting and publication of the notices of sale. Third, a mortgagee-creditor may participate in the bidding and purchase the mortgaged property at the public auction sale under the same conditions as any other bidder, and its title cannot be impeached on the ground that a mortgagee cannot be a purchaser at its own sale. This is the express exception created by Section 5 of Act Number 3135, as amended, and it prevails over the general Civil Code prohibition on agents acquiring the property entrusted to them, following the rule that a special statute prevails over a general one.

Disposition

The Supreme Court denied the petition for lack of merit and affirmed the decision of the Court of Appeals, with no pronouncement as to costs.

Remember This

The one line to memorize: an extrajudicial foreclosure sale under Act Number 3135 needs no levy, and the mortgagee may bid and buy at its own sale. Examiners use this case to test the distinction among the three kinds of sale and the rule that a special law prevails over the general Civil Code prohibition on agents purchasing the property entrusted to them.